Death, taxes, etc.
Guest blogger Leanne Salyzyn is an insolvency counselor, licensed restructuring professional and trustee in bankruptcy. Post a comment or contact her on Twitter with your …
Investing in the future
By admin | Feb 13, 2013Tags: finance, RRSP
Guest blogger Leanne Salyzyn is an insolvency counselor, licensed restructuring professional and trustee in bankruptcy. Post a comment or contact her on Twitter with your personal-finance questions.
It’s that time of year again: RRSP season. Time to stop dreaming about what retirement could be like and make a plan to make it happen. The deadline for contributions to be counted on your 2012 income tax return for tax deduction purposes is February 28, 2013, however retirement planning should be considered all year long.
An RRSP is an investment registered with the federal government to help us save for our retirement. The purpose of this investment is to let it grow tax-free until we require it when we retire. For most of us, there are many tax advantages to investing in RRSPs.
Defer taxes on money saved today
Profits made on investments such as interest, dividend, capital gains are not immediately taxable to you as income. You don’t pay income tax until the funds are withdrawn from the plan. The thought is that when you retire, your tax bracket will be lower than when you are working. Therefore, you’ll pay less income tax on the surrender if you hold off withdrawing the funds until after you stop working.
Tax credits
You get an immediate tax receipt for the money contributed to the RRSP, which can then be deducted from the taxable income on your tax return. This usually generates a tax refund for most tax payers. This refund can then be reinvested into the RRSP to grow your savings.
Timing is everything
Due to compounding interest, you earn interest on your interest. The earlier you start saving, the greater return to you in the long run. Setting up monthly contributions to your RRSP, no matter how nominal, makes sense over just one annual contribution. With the magic of compounding interest, your investment grows each month inside the plan.
Many employers match contributions
Who would pass up free money? Many employers match RRSP contributions made by their employees in group plans through work. Why not participate? If it’s immediately deducted from your pay check, you won’t miss what you never had.
Borrow from your RRSP
You can “borrow” from your RRSP for purposes such as buying your first home (Home Buyers Plan) or funding your education (Lifelong Learning Plan). The government will require you to repay the monies you borrowed from your own plan, forcing you to save again.
But RRSPs are not for everyone; there are also disadvantages, too:
Taxed on withdrawals
You will be taxed on the funds you withdraw. If you require these funds due to an emergency and you are in a high tax bracket, you will pay a substantial amount of income tax and may even owe income tax at year’s end.
Can’t last forever
RRSPs must be terminated by age 71 and converted to a LIF (Life Income Fund). Then, annually you will receive income by law and taxed at whatever tax bracket you are in at that time.
Limits to contributions
You’re only allowed to contribute a certain RRSP threshold each year based on your previous year’s income and prior contributions.
When thinking about retirement, consider at a minimum three sources of income: government assistance, such as CPP, OAS; employer provided benefits like company pensions and self-directed savings. It’s always a good idea to depend on your own resources as much as possible, instead of putting all your eggs into the government assistance basket.
Excellent topic and content. Well written Leanne.